STANDARD COSTING

STANDARD COST is defined as a cost expected to be incurred for the process, production or
any activity under normal conditions.

Standard costing is a system of accounting that uses predetermined standard costs for

direct material, direct labor, and factory overheads.

Standard costing is the second cost control technique, the first being budgetary control. It is
also one of the most recently developed refinements of cost accounting.

The standard costing technique is used in many industries due to the limitations of historical
costing. Historical costing, which refers to the task of determining costs after they have
been incurred, provides management with a record of what has happened.

For this reason, historical costing is simply a post-mortem of a case and has its own
limitations.

For managers within a company, exercising control through standards and standard costs is

a creative program aimed at determining whether the organization’s resources are being
used optimally.

Standard costs are typically determined during the budgetary control process because they
are useful for preparing flexible budgets and conducting performance evaluations.

The use of standard costs is also beneficial in setting realistic prices. Along with this,
standard costs help to identify any production costs that need to be controlled.

Importantly, comparison of actual cost with standard cost shows the variance. When
correctly analyzed, this shows how to correct adverse tendencies.

STANDARD COST AND VARIANCE ANALYIS

The difference between actual cost and standard cost is called as Variance. The variance
tells us whether the actual expenses are within the parameters or not.

Actual Cost > Standard Cost = Unfavourable Variance = U

Actual Cost < Standard Cost = Favourable Variance = F
Actual Cost = Standard Cost = No Variances

In case of Unfavourable variances, the entity need to determine the reasons for such variance and
should take necessary actions to bring the cost under control in future.
MATERIAL VARIANCE

1. Material Cost Variance

2. Material Price / Rate Variance
3. Material Cost / Usage Variance
4. Material Mix Variances = Only when two or more than two materials are used.
5. Material Yield Variance

Note : Before applying any formula for calculation of variances, a table should be prepared for
standard quantity, standard Rate and Standard cost for actual quantity. ****

SQ = Standard Cost
SR/ SP = Standard Rate/ Standard Price
AP / AR = Actual Price / Actual Rate
AQ = Actual Quantity

1. MATERIAL COST VARIANCE

MCV = (SQ X SR) –(AQ x SR)

2. MATERIAL PRICE/RATE VARIANCE

MPV = AQ (SR –AR)

3. MATERIAL QUANTITY/USAGE VARIANCE

MQV = SR X (SQ –AQ)

4. MATERIAL MIX VARIANCE

MMV = SR X ( RSQ –AQ )

5. MATERIAL YIELD VARIANCE

MYV = SC PU X (Standard output for actual Input – Actual Output)

MCQ = MRV + MQV

Q 1. The standard cost of material for manufacturing a unit of a particular product PEE is estimated
as below :
15 Kgs of raw mterail @ Re 1 Per Kg
On completion of the unit, it was found that 20 Kgs of raw material costing RS 1.50 per kg has been
consumed. Compute Material Variances.

Q2. A manufacturing concern which has adopted standard costing system gives following data :
Standard :
Material for 70 Kgs of output 100 Kgs
Price for Material Re 1 Per Kg
Actual :
Output 210,000 Kgs
Material Used 280,000 Kgs
Cost of Material Rs. 252,000
Calculate :
a) MUV
b) MRV
c) MCV

Q3. Standard set of material consumption was 100 Kgs @ Rs. 2.25 Per Kg.
In a period,
Opening stock was 100 Kgs @ Rs. 2.25 Per Kg
Purchases Made 500 units @ Rs. 2.15 Per Kg
Consumption 110 Kg
Calculate :
a) MUV
b) MPV i) When variance is calculated at point of purchases ii) when variance is calculated at
point of issue on FIFO basis iii) When variance is calculated at point of issue on LIFO basis.
c) What is the effect on closing stock valuation when material are charged out to cost on FIFO
and LIFO basis.

Q4. Calculate Material variances from following :

Standard Actual
Material
A 90 units at Rs. 12 100 units at Rs. 12
B 60 units at Rs. 15 50 units at Rs. 16

Q 5. The standard material cost for 100 Kgs of chemical D is made up of :

Chemical A 30 Kgs at Rs. 4 per kg
Chemical B 40 Kgs at Rs. 5 Per Kg
Chemical C 80 Kgs at Rs. 6 Per Kg
In a batch, 500 Kgs of chemical D was produced from a mix of :
Chemical A 140 Kgs at cost of Rs. 588
Chemical B 220 Kgs at cost of Rs. 1056
Chemical C 440 Kgs at cost of Rs. 2860

Q 5. Determine Material Variances

Units produced for Z 8000 Kgs
X Y
Standard usage per Kg of Z 0.75 Kg 0.50 Kgs
Actual Usage 6100 Kgs 4400 Kgs
Standard Price per Units Rs. 4 Rs. 10

Q 6. Standards Actual
Qty Rate Total Qty Rate Total
Material A 10 2 20 5 3 15
Material B 10 3 60 10 6 60
Material C 20 6 120 15 5 75

Q 7. A standard Material cost to produce a tonne of chemical X is :

300 Kgs of Material A @ Rs. 10 Per Kg
400 Kgs of Material B @ Rs. 5 Per Kg
500 Kgs of Material C @ Rs. 6 per Kg
During a period, 100 tonnes of mixture X were produced from the usage of :
35 tonnes of Material A at Cost of Rs. 9000 per tonne
42 tonnes of Material B at Cost of Rs. 6000 per tonne
53 tonnes of Material C at cost of Rs. 7000 per tonne.
Calculate material Variances.

Q 8. The standard cost of a certain chemical mixture is :

35% Material A at Rs. 25 Per Kg
65% Material B at Rs. 36 per Kg
A standard loss of 5% is expected in production
During a period there is ued :
125 Kgs of Material A at Rs 27 per Kg
275 Kg of Material B at Rs. 34 Per Kg
The actual output was 365 Kgs
Calculate maximum possible material variances..

Q 9. Pragati Company manufactures a product P by mixing three raw materials. For every 100 Kgs of
output 125 Kgs of input are used. In April 2021, there was an output of 5600 Kgs of P. The data is as
below :
STANDARD ACTUAL
Mix Price Per Kg Mix Price Per Kg

Material
I 50% 40 60% 42
II 30% 20 20% 16
Iii 20% 10 20% 12
The actual quantity of Material used was 7000 Kgs. Calculate all material variances .